Weekly Global Economic Update

Week of February 9, 2026

• Kevin Warsh and the return of Greenspan-style monetary policy
• Data indicates US job market weakness
• US and India reach a trade deal
• Eurozone inflation eases as the ECB keeps monetary policy steady
• Mario Draghi urges greater economic and political integration in Europe

Kevin Warsh and the return of Greenspan-style monetary policy

• Among economists and investors, there has been considerable discussion about what to expect from Kevin Warsh, who has been nominated by President Trump to replace Fed Chair Powell a few months. What can we reasonably expect and what might it mean for the economy?

Warsh’s most relevant experience was his service as a member of the Federal Reserve Board for five years from 2006 to 2011. During that time, the global financial crisis took place. Perhaps the most notable response of the Fed was to engage in quantitative easing, which is massive purchases of government bonds and other assets. The purpose was to inject liquidity into the financial system at a time when banks were not lending due to a seizing up of credit markets. This policy had been previously proposed by economists as disparate as Milton Friedman and Paul Krugman. Yet it was controversial. Some analysts worried that, by undertaking quantitative easing, the Fed would boost the money supply too rapidly, thereby leading to much higher inflation. This was the view then taken by Warsh. However, quantitative easing did not lead to a big increase in the money supply. Rather, it prevented a contraction in the money supply as happened during the Great Depression. Inflation remained tame.

Today, Warsh continues to be concerned about the size of the Fed’s balance sheet, which was expanded again during the pandemic. In that instance, the money supply did expand rapidly, contributing to a surge in inflation. Although the Fed has recently reduced the balance sheet, it remains historically high as a share of GDP. Warsh has called for the Fed to further reduce the size of its balance sheet through asset sales. The net impact should be to reduce the growth of the money supply, which would be disinflationary. In addition, a sale of government bonds would likely lead to higher bond yields.

Yet Warsh’s view on the Fed’s balance sheet is not necessarily related to inflation concerns. Rather, he believes the Fed should not be a big participant in the market for government bonds as this risks having monetary policy finance government borrowing. He believes that monetary policy should not play a role in fiscal policy. Instead, Warsh has called for a reduction in short-term interest rates because he believes inflation is less of a problem than many investors believe. That is because he expects AI to fuel an acceleration in labor productivity. If that happens, wage increases can be offset by increases in output. Then employers needn’t pass on wage costs to customers in the form of higher prices. As such, productivity gains are generally disinflationary.

Warsh and Treasury Secretary Bessent believe that this moment is similar to what happened in the 1990s when an acceleration in productivity helped to suppress inflation while allowing the economy to grow rapidly. Indeed, at that time, Fed Chair Alan Greenspan chose to keep interest rates low despite a strong economy. This was on the belief that investment in information technology would boost productivity growth, thereby reducing inflationary pressure. In fact, Bessent recently said that “it’s clear that we are at the nascent stages of a productivity boom, not unlike the 1990s.” And this is not simply a view held by the administration. Lisa Cook, the Fed governor, also said that “growing evidence shows that AI has the power to significantly boost productivity.”

If Warsh is confirmed by the Senate (which seems likely), will he succeed in convincing the other 11 members of the policy committee to cut short-term rates and, at the same time, sell government bonds? We cannot know the answer. On one hand, selling of bonds could boost bond yields, potentially weighing on credit market activity and offsetting the impact of lower short-term interest rates. On the other hand, a steeper yield curve could boost the profitability of banks, thereby helping credit market activity. Meanwhile, some investors worry that a rapid effort to shrink the Fed’s balance sheet could create financial market volatility. As such, many expect any such approach to be implemented gradually and with caution.

Data indicates US job market weakness

• In January, corporate America announced a sizeable increase in job dismissals, according to the latest report from Challenger, Gray, & Christmas, an employment services company. Challenger reported that US-based companies announced 108,435 job cuts in January, the highest total since October and the largest January figure since 2009, at the height of the global financial crisis. Challenger commented that there is usually a surge in job cuts in the first quarter of any year, but that this January’s number was unusually high.

Of the 108,435 announced dismissals in January, 46,000 were due to decisions by just two companies: one in transportation and one in technology. In addition, hospitals announced 17,107 layoffs, the highest since the pandemic.

According to Challenger, companies reported that 28,392 dismissals were due to “market and economic conditions.” Another 20,044 were due to “restructuring.” And 12,738 were due to “department closings.” The largest single reason for dismissals was “contract loss.” Yet notably, only 7,624 dismissals were attributed to AI. For all of 2025, 54,836 dismissals were attributed to AI. Finally, in January, only 294 dismissals were attributed to tariffs.

Meanwhile, a separate report found weak job growth in January. ADP, a payroll processing company, releases a monthly estimate of private sector job growth that is often, but not always, a good predictor of the government’s job numbers. For January, ADP reported that 22,000 private sector jobs were created, a relatively weak number.

By industry, ADP reported a loss of 57,000 jobs in professional and business services in January. This was offset, however, by a 74,000 job gain in education and health services. In most other industries, the change in employment was small, with a loss of 8,000 manufacturing jobs and an increase of 9,000 construction jobs. ADP’s chief economist said that “while we've seen a continuous and dramatic slowdown in job creation for the past three years, wage growth has remained stable.” This might be due to weak labor supply growth because of a restrictive immigration policy.

Finally, the number of job openings in the United States fell in December to the lowest level since 2020. The US government’s Job Openings and Labor Turnover Survey (JOLTS) found that, in December, there were 6.5 million job openings in the United States, declining from 6.9 million in November and 7.5 million one year earlier. It was the lowest number since September 2020. The job opening rate (share of available jobs that are unfilled) fell to 3.9% in December, down from 4.2% in November and 4.5% a year earlier. This was the lowest job opening rate since April 2020 at the start of the pandemic, indicating a continued easing in job availability.

US and India reach a trade deal

• Last year the US imposed a 50% tariff on most imports from India with some exceptions because India continued to purchase oil from Russia. Now, however, after Prime Minister Modi pledged to stop purchasing Russian oil, the United States agreed to cut the tariff from 50% to 18%, “effective immediately."

The relationship between India and the United States had seemed favorable early last year, with the two sides agreeing to expand trade significantly during this decade. But that momentum later slowed when Prime Minister Modi refused to publicly state that President Trump had ended the conflict between India and Pakistan. After that, tariffs were imposed. Yet the situation started to change recently after the EU and India signed a major free trade agreement. This followed conclusion last year of a trade deal between the United Kingdom and India. Thus, the time seemed right for the United States and India to reach a deal.

The agreement reached between India and the United States calls for India to cut tariffs on key products to zero. In addition, India pledges to purchase US$500 billion in goods from the United States. It is not clear if this is meant to be over a long period of time or during a single year. In any event, India currently imports about US$50 billion in goods from the United States each year. Thus, reaching the US$500 billion goal would take decades and can only be seen as aspirational rather than a firm plan.

Meanwhile, the deal reached is not a signed agreement. Rather, it is merely a statement on social media with no specifics and no enforcement mechanism. However, if the reduction in tariffs takes place and is not reversed, it will surely be beneficial for the Indian economy. Indeed, the United States is India’s largest export market, accounting for about 20% of Indian exports. As such, it is not surprising that the announcement was followed by a surge in the value of the Indian rupee and the value of Indian equities.

Some of India’s higher-valued exports have already been exempt from the 50% tariff. This includes pharma products and consumer electronics. Thus, the reduction in the tariff will largely have an impact on exports of more labor-intensive products such as textiles and apparel. As such, it will be favorable for employment creation. Moreover, the new 18% tariff will be in line with US tariffs on several countries in Southeast Asia that export textiles and apparel. Given India’s lower labor costs, this new development will put India in a favorable competitive position.

Finally, India’s pledge to stop purchasing Russian oil could be disruptive to the global oil market. It will require that India rapidly shift toward purchases from other countries, potentially including the United States. An analysis by Moody’s said that a full shift away from Russian oil “could also tighten supply elsewhere, raise prices and pass through to higher inflation given that India is one of the world's largest oil importers.”

Eurozone inflation eases as the ECB keeps monetary policy steady

• Inflation in the Eurozone eased in January. This, along with relatively healthy economic growth, has led the European Central Bank (ECB) to keep its benchmark interest rate unchanged for the fifth consecutive month. If the ECB worried that the economy is weakening, it would have cut the rate. If it worried that inflation is accelerating, it might have increased the rate. This decision suggests that they are not worried about either. In any event, let’s look at the details.

Specifically, the European Commission reported that, in January, consumer prices in the Eurozone rose 1.7% from a year earlier and declined 0.5% from the previous month. The 1.7% figure was the lowest since September 2024. When volatile food and energy prices are excluded, core prices rose 2.2% from a year earlier and declined 1.1% from the previous month. The 2.2% figure was the lowest since October 2021.

Very low inflation is often a sign of a weakening economy. That is not the case now. The Eurozone economy has been growing at a modest but healthy pace. Rather, the deceleration of inflation partly reflects the impact of an increase in the value of the euro. That, in turn, puts downward pressure on import prices. In addition, a decline in energy prices contributed to the weakness of headline inflation. On the other hand, prices of services have lately accelerated, likely reflecting the impact of rising wages in a tight labor market.

Annual inflation in January was 2.1% in Germany, 0.4% in France, 1% in Italy, 2.5% in Spain, 2.2% in the Netherlands, 1.4% in Belgium, and 2.8% in Greece.

Meanwhile, the ECB policy committee met recently and chose to leave the benchmark interest rate unchanged for the fifth consecutive month. The benchmark rate is now 2%, down from 4% as recently as mid-2024. The easing of monetary policy from mid-2024 to mid-2025 is likely having a positive impact on economic growth. Usually, monetary policy acts with a lag.

Notably, during the second half of 2025, the US Federal Reserve cut its benchmark rate while the ECB held its rate steady. Normally, this shift in the rate gap would have led to a depreciation of the euro against the US dollar. That, in turn, might have led to concerns about Eurozone inflation. Instead, the euro appreciated as investors reduced holdings of dollar-denominated assets and attempted to diversify their portfolios away from the US dollar. The rise in the euro likely contributed to the easing of inflation in the Eurozone.

Mario Draghi urges greater economic and political integration in Europe

• Three very big economies globally that stand apart in scale and influence: the United States, China, and Europe. Yet unlike the United States and China, Europe is not a cohesive entity. Of course, the European Union, and in particular the Eurozone, represent the continent when it comes to trade negotiations and monetary policy. Yet according to Mario Draghi, former head of the ECB and former prime minister of Italy, this is not enough to enable Europe to compete on a level playing field. As such, Draghi, who previously authored a highly regarded report on how to make Europe more competitive, now says that the EU must do more to consolidate power and become more of a federation. He specifically said that member states need to “avoid being picked off one by one.”

Draghi noted that the EU faces difficulty in making important decisions because all important decisions require unanimity of member countries. He said that such a model does “not produce power.” He also noted that Europe faces new threats that can only be addressed as a group, noting that “we are all in the same position of vulnerability, whether we see it yet or not. The old divisions that paralyzed us have been overtaken by a common threat. But threat alone will not sustain us. What began in fear must continue in hope.”

So, what is Draghi’s solution? According to him, “Where Europe has federated: on trade, on competition, on the single market, on monetary policy, we are respected as a power and negotiate as one. Where we have not: on defense, on industrial policy, on foreign affairs, we are treated as a loose assembly of middle-sized states, to be divided and dealt with accordingly.” He said that a closer federation could “act decisively in all circumstances.”

Draghi’s vision has been discussed before during the long history of European integration since the end of World War Two. As the EU enlarged, it became more difficult to reach consensus. And as the remit of the EU expanded, divisions became more intense. Plus, some countries have resisted further integration for fear of losing sovereignty or fear of being compelled to follow policies on which they are not aligned. The decision by the United Kingdom to exit the EU followed many years of resistance to regulatory mandates stemming from Brussels. Thus, it is likely that Draghi’s vision may not be realized soon. Still, given the perception that Europe is now more alone than in the recent past, anxiety about the current situation could light a fire that stimulates more action on integration.

Week of February 2, 2026

• The Fed leaves rates steady while the president chooses a new Fed chair
• Many countries are attempting to reduce their dependence on the United States
• US trade deals involved commitments to invest in the United States. Will it work?

The Fed leaves rates steady while the president chooses a new Fed chair

• As widely expected, the Federal Reserve’s policy committee left the benchmark interest rate unchanged last week, in the range between 3.5% and 3.75%. The vote was 10 to 2, with two members preferring to cut the benchmark rate by 25 basis points.

Meanwhile, the Fed’s decision came at a time of heightened public attention on the relationship between the Fed and the administration: In this backdrop, Chair Jerome Powell emphasized the importance of policy independence, and said that “it’d be hard to restore the credibility of the institution if people lose their faith that you’re making decisions only on the basis of our assessment of what’s best for everyone.”

Leaving aside the personnel aspects of the Fed, let’s consider the economics: The Fed’s decision was largely based on the view that the economy is stronger than previously expected, which could pose an inflationary risk. Moreover, underlying inflation remains above the Fed’s target. Powell said that “the economy has once again surprised us with its strength—not for the first time.” The committee gave no indication as to when, or even if, it will reduce rates this year.

The Federal Reserve has a mandate to minimize inflation and maximize employment. And although employment growth has been subdued, the Fed has indicated that this is mainly a reflection of immigration policy, which has subdued labor force growth. Meanwhile, productivity is growing rapidly, generating strong economic growth. In this situation, the Fed saw limited need to address slow job growth, especially when the unemployment rate remains low.

Investors were not surprised by the Fed’s decision. Equity prices and bond yields did not move much. However, the dollar rebounded strongly, although that was probably unrelated to the Fed’s decision. Rather, the US dollar had previously fallen sharply when President Trump said he was not concerned with a declining dollar. Later, however, Treasury Secretary Bessent said that “the United States always has a strong dollar policy, but a strong dollar policy means setting the right fundamentals.” This was interpreted to mean that the government is not attempting to reduce the value of the dollar. Hence, the dollar appreciated.

• Two days after the Fed’s decision, President Trump announced that he intends to appoint Kevin Warsh to succeed Jerome Powell as chairman of the Federal Reserve Board. Last year, the administration appointed Stephen Miran to the board for a term that soon expires.

Warsh, like Powell, is an attorney, rather than an economist. His most relevant experience comprised the five years he served on the Federal Reserve Board from 2006 to 2011. At the age of 35, he was appointed by President Bush and served for five years. He was, and remains, the youngest Federal Reserve Board member ever. His tenure coincided with the global financial crisis. The Fed, under Ben Bernanke, cut interest rates dramatically and engaged in quantitative easing (bond purchases) to boost liquidity at a time when banks stopped lending. The policy was a success in that it restored credit market activity, but Warsh was, and remains, a fierce critic of that policy, arguing that it risked significant future inflation.

This suggests that Warsh is an inflation hawk—generally a strong supporter of tight monetary policy even in the face of economic contraction. Yet, today, Warsh has expressed support for a meaningful cut in interest rates, even though inflation remains above the Fed target.

Many countries are attempting to reduce their dependence on the United States

• British Prime Minister Keir Starmer went to China recently. Canadian Prime Minister Mark Carney was there as well. Soon, the leaders of Germany, Finland, and Ireland will also be traveling to Beijing. All of these countries were, until recently, firm allies of the United States, and had often supported US efforts to limit China’s access to advanced technologies and to their own markets. Recently, however, some governments have begun reassessing their economic strategies in light of global trade policy shifts, including new US tariffs and broader uncertainty around long‑standing economic and political alliances.

If the massive US market becomes more constrained or less predictable, then the leaders of these countries would like to find economic access elsewhere. And what better place than China, the world’s second largest economy. Moreover, China has lately eased trade restrictions and encouraged more economic liberalization and integration.

What might this mean for the United States? In a way, the United States could be repeating what China did in the 15th century. At that time, China was the richest nation on earth, having developed the leading technologies of the time and having built an impressive economic infrastructure. Yet, after engaging in pioneering exploration and building trading relations around Asia, the Middle East, and Africa, China turned inward, reducing engagement with the world. In the long run, this led China to fall behind the West and miss the opportunity to benefit from the industrial revolution. Only in the past half century has China reversed its isolation and once again become a global power.

What is the United States doing and how might it affect the long-term role of the country in the global economy? First, it has taken steps to limit certain forms of trade and cross-border economic activity. Plus, the United States has withdrawn from several international organizations and questioned the importance of military alliances. These actions could, over time, reduce the role of the US dollar in the global economy. The dollar has recently declined, hitting a four-year low earlier this week.

Second, the country is cutting back on government funding for some scientific research. Such funding played a major role in fueling innovations that sustained US dominance in multiple industries over the postwar era.

Third, innovation was also fueled by the United States welcoming the world’s best talent. Recent changes in immigration policy may impact its position in science and technology, hence. In recent decades, a large share of innovation and enterprise creation was due to immigrants.

What might a world with lessened US engagement look like? It may take decades before the full implications emerge. And that assumes that the inward turn of the United States is not reversed under a future administration. Often, in US politics, when the pendulum swings too far in one direction, it quickly reverses course. That could happen in the near future regarding trade, migration, and funding for research. In any event, a world in which the United States is less of a dominant political force (even though it will be a major economic force) would be like a return to the 1920s and 1930s, during which, the country was the world’s dominant economy but played only a minor role in geopolitics.

Meanwhile, other countries are not standing still: In Europe, Canada, Singapore, and the United Arab Emirates, among others, there are efforts to attract scientists from the United States. The goal is to boost their ability to develop cutting-edge ideas, industries, products, and companies.

Back to Kier Starmer. As prime minister of the United Kingdom, he leads what was traditionally the closest ally of the United States. There used to be talk of a special relationship. Increasingly, the relationship is viewed as transactional rather than based on emotions or values. Starmer could draw criticism from the United States in going to China, similar to the criticism recently faced by his Canadian counterpart. But Starmer seems to be convinced that the United Kingdom needs a new approach to trade. He took with him several leaders of British companies who are keen to boost their economic relations with China. Plus, if the United Kingdom cannot maintain a special economic relationship with the United States, it will likely seek to restore some of what was lost with the European Union post Brexit. Although it seems unlikely that Britain will rejoin the European Union, a more integrated relationship is a strong possibility.

US trade deals involved commitments to invest in the United States. Will it work?

• In the past year, a pattern appears to have emerged in US trade relations with other countries: First, the administration would impose a steep tariff on imports from a given country. Then negotiations would take place. A deal would be reached in which the US side would typically cut the tariff (although leaving it at a historically high level). In exchange, the other country would agree to boost imports from the United States as well as direct investments in the United States. The latter usually involved a pledge to provide funds that the US government would decide how to invest. Such agreements were reached with the European Union, Japan, South Korea, and Taiwan, among others. 

According to the Peterson Institute, pledges to invest in the United States add up to about US$5 trillion over roughly 10 years—although time frames vary by country. The administration says it is using its leverage to boost investment in the US manufacturing and energy sectors and to end “unbalanced economic relationships.” The question arises as to whether this volume of investment will, in fact, take place; and, if so, what will be its impact.

As to whether it will happen, it is unclear. Many of the announced deals were essentially written lists of terms on which both sides shook hands. There were few formal agreements submitted to legislatures for approval—certainly none to the US Congress. They generally do not include detailed enforcement mechanisms other than the potential to raise tariffs again if the terms are not fulfilled. Also, for market-based economies such as the European Union and Japan, it is not clear how governments can influence private sector actors to boost imports from, and investments in, the United States.

In any event, if there turns out to be a significant increase in inbound direct investment into the United States, there are several potential implications. First, a big increase in investment in the US manufacturing and energy sectors would entail an increase in the demand for labor. Yet, the nation already faces a labor shortage, likely intensified by current immigration policy. Thus, the ability to boost capacity could be hindered or could become expensive.

In addition, due to tariffs, the US manufacturing sector currently faces increased costs that are not shared by foreign competitors. Thus, the ability to compete in global markets could be hampered. As for the energy sector, oil prices are falling, thereby reducing the attractiveness of investing in new capacity. On the other hand, there is a burgeoning shortage of electricity due to massive demand on the part of data centers. Thus, there is a case to be made for more electricity-generating capacity.

Second, a big increase in inbound investment into the United States necessarily implies a big increase in the US trade deficit. Inbound flows of capital increase the demand for dollars, pushing up its value. That, in turn, dampens demand for US exports and increases demand for US imports. The result is a bigger trade deficit. The trade balance and the capital account balance offset one another.

Finally, the terms of several trade deals indicate that the administration will decide how the money is invested. There is a long history of countries in which governments decided on how capital was allocated. At the least, the result was often inefficiency and low returns. Often, capital flowed to players that were less competitive but had political influence. In such cases, investment was largely driven by the need to avert unemployment rather than the need to generate positive returns.